“Climate Change, Cyclone Risks, and Economic Growth:
A `Business Cycles’ Approach”

Laura Bakkensen and Lint Barrage

May 2017

Abstract: “Climate change is altering the global distribution of extreme weather event risks. While the direct damage costs of these changes are increasingly well-studied, their broader economic impacts remain an open question. This paper brings a “cost of business cycles” approach to estimating the welfare costs of changes in cyclone risks in general equilibrium. First, we empirically relate historical cylone strikes to (i) the distribution of idiosyncratic income shocks facing households, (ii) changes in total factor productivity, and (iii) capital losses. Our application focuses on Vietnam, utilizing the Vietnam Household Living Standards Survey (2004-2014) along with other data sources. Second, we develop a quantitative version of Krebs’ (2003) stochastic endogenous growth framework based on these impact channels. The model provides a structural mapping from weather to climate impacts by accounting for households’ responses to changes in the weather distribution as a function of the estimated costs of weather realizations. Third, we utilize simulations of tropical cyclones in both the current (2000) and future (2100) climate (Emanuel, 2008) to project the effects of future cyclone risks on household savings and investment behavior, growth, and welfare. The benchmark results suggest that changes in cyclone risks will depress long-run growth in Vietnam by an economically significant 0.07-0.14 percentage points – on the same order of magnitude as recent estimates of the effect of U.S. business cycles on U.S. growth (Krebs, 2003, Barlevy, 2004). The associated welfare costs are estimated to range from -0.9% to -1.70% of initial consumption.”